In the course of agile transformation initiatives in an increasingly complex world, companies of all sizes and industries are turning away from the traditional concept of Management by Objectives (MBO) an implement Objectives and Key Results (OKRs) in their companies. On the one hand, OKRs are often communicated as an improvement and modernization of goal management. On the other hand, many employees see OKRs merely as a continuation of MBO in a new conceptual disguise. This article explains the most striking differences and how organizations succeed in the transition to OKRs.
MBO vs. OKRs
MBO was introduced in the 1950s by Peter Drucker. The basic idea is to align the activities of all units in a company with defined goals. Employees are free to choose the path to achieving these goals and their performance is measured by results. In order to align the activities of all employees, teams and departments within the company, goals are cascaded from top to bottom. This means that goals are first set at the company level and step by step defined for the lower levels down to the smallest unit of the company, the employees.
OKRs describe a method for the development and management of objectives. Several objectives are set for a given period, usually a quarter. These objectives are broken down into 2-5 smaller key results. While the overarching objectives are defined qualitatively and in a demanding way, the associated Key Results primarily ensure measurability. OKRs can be defined at all levels of the organization: for the entire company, a department or the individual employee.
You can find a detailed explanation in our article “Objectives and Key Results”
Similarities and differences between OKRs and MBO
At first glance, both approaches are very similar. Both frameworks structure work according to goals and apply to all levels of the company. Nevertheless, OKRs differ considerably from MBOs. While MBO objectives are quantitative and often formulated as KPIs, OKRs consist of qualitative objectives, which are broken down into quantitative key results through key results. By structuring the objective in detail and setting qualitative targets, OKRs emphasize the process of achieving the objective, whereas in MBOs the focus is on the result. This fundamental difference between MBO and OKRs goes far beyond the pure goal-setting technique and affects all levels of a company.
1. Leadership – Management versus Coaching
With MBO, targets are set once for a period and then cascaded from top to bottom. During the period, care is taken to ensure that employees act in accordance with the goal. At the end of the period, the degree to which the objectives have been achieved is measured. MBO thus corresponds to the classic management philosophy of planning, management and control. OKRs put stronger emphasis on the way to the goal, than the goal itself. During the OKR cycle, the status of goal achievement is discussed in mostly weekly meetings and feedback is given on employee performance. At the end of a cycle, retrospectives and reviews are used to analyze whether the goals have been set correctly in terms of content and form. The findings are then incorporated into the next OKR cycle. In this way, OKRs place a much stronger focus on employee development rather than results.
2. Coordination – Top-Down versus Top-Down & Bottom-Up
Not only the process to achieving goals, but also the goal setting itself is different in OKRs and MBO. In MBO, the goals of the company are set by the management of the company. Based on the overarching goals, the departments, teams and employees are then given their own objectives. Therefore, determination of the goals runs from top to bottom (top-down). In the case of OKRs, goals for the entire company are also set at management level, and the goals of the departments, teams and employees are aligned with these goals. However, the employees at each level also actively develop their own goals and, thus, shape the goals of their team, their departments and the company. This means that objectives are set from top to bottom (top-down) as well as from bottom to top (bottom-up).
3. Cooperation – specialization versus coordination
The differences between MBOs and OKRs in goal and performance management also affect the cooperation between employees and departments. The structured and clear setting of objectives for a longer period of time, as practiced in MBO, provides most employees with a clearly defined and delineated field of tasks. This allows employees to concentrate on their tasks and requires comparatively little coordination. Working with OKRs, on the other hand, requires constant development and discussion of objectives. By defining qualitative, ambitious goals, overlapping activities of employees are easier detected. As a result, employees coordinate their work more closely, can use synergies and avoid duplication of effort.
4. Target horizon – consistency versus agility
In MBOs, targets are usually set and measured once a year. Therefore, employees can work on clearly defined goals over a longer period of time and ensure consistency in the work processes. In contrast, an OKR cycle usually lasts only one quarter. Additionally, teams discuss and update the interim status of the goals on a weekly basis. This allows teams and employees to react very quickly to changing circumstances and unexpected events.
5. Motivation and incentives – extrinsic versus intrinsic
As explained above, OKRs emphasize the process of goal achievement and, thus, the activity itself, while MBOs focus on the result. This also affects the motivation of the employees. MBO works strongly with extrinsic motivation and incentives. This means that a reward, e.g. a bonus, is linked to a certain activity or more precisely its result. Companies with OKRs traditionally work less with rewards, as OKRs are primarily intended to make employees more ambitious and open to experiment. This can only be achieved if the appreciation of an employee does not depend on the result, but on his approach to goals.
6. Communication – control versus transparency
The different concepts of OKRs and MBOs in terms of incentives and OKRs also affects communication within the company. The main objective of MBOs is to ensure that the employee works in line with the overall objectives. This is done by measuring and controlling the achievement of objectives, whereby usually only the employee himself and his superior can gain insight into the achievement of objectives. OKRs, on the other hand, try to give all employees insight into the current goals and the status of other employees in order to stimulate efficient cooperation. Accordingly, feedback is also given in an ongoing context, for example in weekly meetings or even more closely.
From MBO to OKR
In today’s dynamic world, OKRs are more effective than MBOs at quickly responding to market changes. From a management point of view, the shift to OKRs requires less operative action, but above all a rethinking and letting go. Instead of cascading goals through the organization and granularly setting them for all employees, it is sufficient to set only the business goals and let the employees set their own goals that feed into it. The challenge is to reinterpret the role of a manager and take on a coaching role. This also includes having the initiatives set by the teams. A new error culture and a new understanding of success are also part of the successful implementation of OKRs. Goals that have not been achieved should not be seen as failures, but as part of the learning process.
On the operational level, the shift to OKRs requires new ways of thinking, too. While MBO favors working in silos, OKRs promote cross-functional collaboration. Initiatives therefore require a high degree of exchange and are designed for shorter periods of time in order to reflect and change direction. Through self-organization, employees are given more responsibility to develop and drive initiatives. At this level, too, a rethinking of the error culture is necessary and employees must allow themselves to view unachieved goals less as failures they are to be blamed for.
The comparison of MBO and OKR makes it clear that the two approaches differ not only on a technical level. They also partly represent a different corporate philosophy. MBOs ensure structure, consistency and control in company processes, while OKRs primarily promote flexibility, creativity and collaboration in companies, the importance of which is increasing for many companies as a result of digitization. This also explains why many organizations are turning to OKRs.
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